Steven Cohen's Stamford-based SAC Capital Advisors is at the center of the biggest insider case ever filed in a sweeping U.S. crackdown on illicit hedge fund trading -- one that focuses on the burgeoning exploitation of secret information on volatile health care stocks.

In doing so, the new case against a former Cohen lieutenant has brought the five-year probe beyond the realm of technology stocks and into the busy underworld of health care industry securities fraud. The charges against former SAC portfolio manager Mathew Martoma also place U.S. prosecutors closer than ever to Cohen, the hedge fund's billionaire owner and founder, in the broadest probe of insider trading in a generation.

Martoma, 38, was accused by prosecutors in Manhattan federal court with playing a lead role in what they called the most lucrative insider-trading scheme in history, given the $276 million profit he allegedly helped the hedge fund achieve. Martoma participated in trading on insider tips about clinical trials of a drug to treat Alzheimer's disease, the U.S. said, and advised Cohen, a Greenwich resident, to sell shares of Wyeth and Elan before bad news about its prospects was announced. The government referred to the "hedge-fund owner" in court papers.

`Sending a message'

"It appears that the government is sending the message that they believe the owner of the hedge fund is acting alongside Mr. Martoma," Brad Simon, a former federal prosecutor now in private practice in New York, said Tuesday in a phone interview. "This would indicate to me that the government's investigation is moving up the chain at a very rapid pace."

Health-care businesses offer illegal traders more opportunities to profit than the finance and technology sectors that have traditionally been prime victims of insiders who leaked confidential data about earnings or deals.

Health companies can live or die on the results of drug trials, which stretch for years before regulators make decisions that can trigger hundreds of millions of dollars in profits or losses.

All-star lineup

The lineup of accused health-industry insider traders includes chief executive officers, hedge fund traders, bankers, lawyers, doctors, accountants, a retired commercial airline pilot, a film producer and a member of Major League Baseball's Hall of Fame. It has touched the FDA and large health-care companies such as Bristol-Myers Squibb and Abbott Laboratories.

Martoma, according to prosecutors, urged Cohen to buy Wyeth and Elan shares based on good news about the Alzheimer's drug trial, then advised him to liquidate SAC's $700 million position after getting a secret tip that the trial had gone badly.

Cohen's firm made huge profits or avoided losses after receiving the advice from Martoma to sell Wyeth and Elan shares, prosecutors said in the complaint. Martoma is charged with conspiracy and securities fraud, which carries a maximum 20-year prison term. Prosecutors don't say in the complaint whether Cohen knew Martoma's advice was based on illegal tips. Neither Cohen nor SAC Capital was charged or sued over the matter.

The U.S. may be seeking to persuade Martoma to assist in a probe of others at SAC, said Andrew Frisch, a defense attorney in New York and former federal prosecutor.

"That they're proceeding by a complaint, as opposed to an indictment, often means the government wants to convince the defendant of the wisdom of cooperation," Frisch, who isn't involved in the case, said in an interview. "Cooperation is always a possibility for a defendant, but it's a question of whether he has information."

Martoma, a former Greenwich resident, is the latest current or former SAC employee implicated in alleged insider trading by U.S. prosecutors, including former portfolio managers Noah Freeman and Donald Longueuil and analyst Jon Horvath.

Cohen, 56, started SAC Capital in 1992 and his hedge fund manages $14 billion. He has been deposed by SEC investigators about trades made close to news such as mergers and earnings that generated profit for his fund, a person familiar with the matter said in June. The person asked not to be identified because the investigation wasn't public.

Additional defendants

Martoma worked as a portfolio manager for CR Intrinsic Investors in Stamford, a unit of SAC Capital, the Securities and Exchange Commission said in a lawsuit filed against him Tuesday in New York. In addition to Martoma, the SEC named as defendants CR Intrinsic and Sid Gilman, a University of Michigan neurologist who was the chairman of a safety-monitoring committee that oversaw a clinical trial of the Alzheimer's drug, bapineuzumab, or bapi. Gilman wasn't charged in the case.

Martoma was arrested Tuesday at home in Boca Raton, Fla. He appeared before U.S. Magistrate David Brannon in West Palm Beach and was released on $5 million bond secured by two family members, said Mary Delsener, a spokeswoman for Manhattan U.S. Attorney Preet Bharara. Martoma is to be in federal court in Manhattan on Monday, Bharara said at a press conference Tuesday.

The SEC claimed Martoma, who specialized in health-care stocks, used Gilman's illegal tips to trade for CR Intrinsic as well as for "hedge fund portfolios managed by an affiliated investment adviser" and controlled by an unidentified "Portfolio Manager A." That manager was Cohen, according to a person familiar with the matter.

`Unholy alliance'

"In this instance, what we see is an unholy alliance between an insider willing to divulge valuable, nonpublic information and a money manager who knew that information is as good as gold," April Brooks, an FBI agent in charge of the New York office's criminal division, said at the news conference Tuesday.

"Martoma and the owner of the hedge fund that employed him traded heavily and aggressively on the expert's information based on inside information in advance of the favorable announcement," Brooks said

Gilman, 80, is a professor of neurology at the University of Michigan Medical School. He has entered into a non- prosecution agreement with prosecutors in which he agreed to testify before a federal grand jury and to forfeit $186,761, money which he was paid by Elan for his consulting work.

`Expect to settle'

"He is cooperating with the SEC and the U.S. Attorney's Office," Marc Mukasey, Gilman's lawyer, said. "We expect to settle with the SEC in short order."

The doctor met with Martoma as a consultant for an expert-networking firm based in Manhattan and had sessions with Martoma from mid-2006 to July 2008, according to the government.

Loren Riegelhaupt, a spokesman for the New York-based expert-networking firm, declined to comment. Bloomberg LP, the owner of Bloomberg News, has an agreement to offer its clients access to Gerson Lehrman consultants.

Over the course of about 42 consultations, Martoma persuaded the doctor to talk about his work on the drug trial, Bharara said.

The doctor passed along the generally positive safety data about the trial, according to the criminal complaint, which doesn't identify the neurologist by name. The SEC's complaint names Gilman as Martoma's source.

Relying on the safety data, Martoma allegedly bought shares of Elan and Wyeth for his portfolio. Cohen also bought Elan and Wyeth, based on Martoma's recommendation, prosecutors said. By the end of June 2008, SAC held about $700 million in the two companies' stocks.

"The hedge fund built up over time a massive position in Elan and Wyeth stock. The hedge fund built up this position, even though it was vocally opposed by several others at the hedge fund who were worried about the risk of that investment," Bharara said. "Martoma was the only person at the hedge fund who was recommending establishing such a large position in Elan and Wyeth based on that drug."

In mid-July 2008, Gilman received secret data showing that bapineuzumab failed to halt progression of Alzheimer's in patients in the clinical test, the U.S. said. The doctor e-mailed Martoma a 24-page PowerPoint presentation detailing the results, which he was scheduled to present at a medical conference on July 29, according to the U.S.

"That is when Martoma, according to the complaint, had to do a spectacular about-face, because he understood that with these negative results looming, the hedge fund's massive $700 million stake had become a terrible bet," Bharara said. "Overnight, Martoma went from bull to bear as he tried to dig his hedge fund out of a massive hole."

Prosecutors said that on July 20 Martoma e-mailed Cohen to ask, "Is there a good time to catch up with you this morning? It's important." The two later talked for about 20 minutes, according to the complaint.

After that conversation, SAC allegedly sold all its Elan shares and shorted the stock in a little more than a week. SAC also liquidated most of its Wyeth stock and took short positions, the U.S. said.

During that time, SAC's Elan trades accounted for more than one-fifth of its trading volume, Bharara said.

On July 27, an unidentified "Senior Trader" at Martoma's company e-mailed Cohen about the week's trading activity, according to prosecutors.

The e-mail said that the fund "executed a sale of over 10.5 million ELN" for four internal hedge fund accounts. The sales were carried out "quietly and effectively" over four days through dark pools and other means, and booked into accounts that had "very limited access," according to the e- mail cited in the criminal complaint.

After the results became public, Wyeth and Elan shares plummeted. Wyeth, which is now owned by Pfizer Inc., fell the most in almost six years on the news. Elan dropped the most in three years.

Prosecutors said Martoma was paid a bonus of $9.38 million in January 2009, based largely on the hedge fund's profit from the Wyeth and Elan trades.

Martoma lost money in the next two years and was fired after another unidentified employee said in a May 2010 e-mail that he was a "one-trick pony with Elan," according to the government.

In addition to the former SAC employees who have been charged criminally, Michael Steinberg, a portfolio manager at SAC's Sigma Capital Management unit, has been described by federal prosecutors as an "unindicted co-conspirator" of Horvath, a former analyst he supervised who pleaded guilty to receiving and passing inside information. Longueuil, who worked for CR Intrinsic in New York from July 2008 to July 2010, was accused of giving information to Freeman, his friend.

In April 2011, former SAC analyst Jonathan Hollander agreed to settle SEC allegations that he traded on inside information about a pending takeover of the Albertson's grocery chain.